FHA Near Limit on Home Loans

Published December 1, 2009

Since the collapse of the subprime housing market the Federal Housing Administration and its financing arm, the federal government-sponsored enterprise Ginnie Mae, have grown by leaps and bounds.

In September 2009 the FHA announced its supplementary reserves have dropped below legally mandated levels. The cause: a growing number of FHA loans and lagging fees due to the increasing number of foreclosures nationally.

In 2008 the FHA backed 21 percent of the home mortgage market, nearly quadruple the level in 2007, according to a quarterly bank lending report released in October under terms of the Home Mortgage Disclosure Act.

The primary holder of the increased mortgage risk is Ginnie Mae. As the FHA grew in recent months, so did Ginnie Mae. In 2006 the total value of mortgage securities backed by Ginnie Mae was $410 billion. That is expected to exceed $1 trillion by 2010. This vastly bigger risk pool places the FHA and Ginnie at increased risk of failure due to the volatile nature of lower-priced mortgage loans.

Nine of 10 Mortgages

When the taxpayer guarantees provided through the FHA, Ginnie Mae, and the government-sponsored enterprises Fannie Mae and Freddie Mac are examined as a whole, nearly nine of every 10 new mortgages in America carry a federal taxpayer guarantee. This places the burden of a chaotic housing industry directly on the shoulders of taxpayers.

In an interview with the Washington Post, FHA Commissioner David H. Stevens emphasized maintaining the FHA’s cash reserves is one of the agency’s primary concerns.

“There’s nothing more serious that we’re addressing right now, outside the housing crisis in general, than this issue,” Stevens told the Post.

Dismisses Bailout Worries

Stevens dismissed talk of need for a bailout, arguing tightened credit standards would be sufficient and no hikes in premiums would be needed to help replenish the reserves.

“There will be no taxpayer bailout,” Stevens said.

But critics say the shrinking reserves are part of a larger overall problem with the growing number of mortgage liabilities being added to the federal system.

“For months, I and others have repeatedly warned that FHA is a powder keg that will explode, so today’s news is no surprise,” said Sen. Christopher S. Bond (R-MO) in a statement responding to the FHA’s announcement of the drop in its reserves.

“Unfortunately this drop is just the tip of the iceberg as job losses continue to mount and more and more homeowners are expected to lose value in their homes,” Bond said.

Matthew Glans ([email protected]) is a legislative specialist in insurance and finance at The Heartland Institute.